Channel 4 has no plans to drop a controversial "transgendered ladies" ad by bookmaker Paddy Power despite almost 500 complaints to the advertising watchdog, which have prompted a rival broadcaster to drop the campaign.

Channel 4's stance is at odds with US sports giant ESPN, which was also scheduled to air the TV ad ahead of the Cheltenham racing festival, which has now pulled the campaign from its network.

"We've reviewed the commercial in question, and have made an internal editorial decision that it will not run on ESPN," said a spokesman for ESPN.

Channel 4 said it had a "duty" to make sure that any ads it airs are fully compliant with the advertising code.

A spokesman for the channel said it was the broadcaster's policy to leave it "up to our viewers to make their own judgment about the adverts they have seen".

The Paddy Power advert asks viewers to spot the "transgendered ladies" among a crowd of racing fans at the Cheltenham festival.

It was accused of inciting transphobia with the campaign, which promised to make the festival's Ladies' Day "even more exciting by adding some beautiful transgendered ladies: Spot the stallions from the mares".

The ad goes on to show a series of shots of well-dressed racegoers with a voiceover guessing which are men and which are women.

Paddy Power said the ad, which has already been broadcast by Sky Sports, had been given the green light by official body Clearcast.

The ASA, which has received 473 complaints about the campaign, has launched an investigation to see if it is in breach of the code.

Paddy Power and BSkyB have been criticised by the lesbian, gay, bisexual and transgender community. BSkyB has said that it has no intention of pulling the ad from its channels.

A spokesman for BSkyB said: "Prior to transmission all advertising is checked by Clearcast, an independent body dedicated to applying the ASA rules and regulations on advertising. If, retrospectively, any ad is thought unsuitable for broadcast, the ASA can step in. When they do so, we always comply with the judgments they make."

LGBT Lib Dems Northern Ireland said Paddy Power had brought "shame on itself" and that the marketing tactic was in poor taste at a time when the UK government is trying to wipe out all forms of prejudice in sport.

"To use the subject of transgender in such a degrading and mocking way is a clear-cut case of transphobia," said the organisation on its website.

Paddy Power said the ad was a bit of "mild-mannered fun" in the runup to the Cheltenham festival.

The CheltenhamFestival.net website said the campaign was "tongue in cheek" but admitted that some people have found it "in poor taste".

Paddy Power is no stranger to controversy, having recently featured Imogen Thomas in a football ad campaign titled "Blow Me" in a bid to capitalise on the publicity surrounding Ryan Giggs's affair.

In 2010 the bookmaker aired what was to become the most complained-about ad of the year featuring blind footballers kicking a cat.

Invited to add their comments, visitors to the site branded it "a disgrace" and "simply horrendous". "I have never seen such an insensitive hate ad," wrote Alex Kennedy.

• To contact the MediaGuardian news desk email editor@mediaguardian.co.uk or phone 020 3353 3857. For all other inquiries please call the main Guardian switchboard on 020 3353 2000. If you are writing a comment for publication, please mark clearly "for publication".

• To get the latest media news to your desktop or mobile, follow MediaGuardian on Twitter and Facebook.